Procter & Gamble Shake-Up Follows Poor Profit Outlook

By DAVID LEONHARDT

Published: June 9, 2000

The chief executive of Procter & Gamble, the consumer products giant, resigned yesterday as the company announced it would suffer another disappointing quarter and its stock price fell to less than half of what it was worth just four months ago.

With the move, Procter acknowledged that it had tried to remake itself into a more aggressive company too rapidly and that its core brands, which include Crest, Pringles and Tide, had suffered as it focused on developing new products.

Procter's board immediately named Alan G. Lafley, a 23-year employee of the company, to succeed Durk I. Jager, the hard-charging executive who had vowed to shake up the company's staid culture and force managers to act in a more entrepreneurial style. It also called John E. Pepper, Mr. Jager's predecessor and longtime rival, out of retirement to serve as chairman.

''In hindsight, it's clear we changed too much too fast,'' said Mr. Lafley, 52, who was a president overseeing the company's beauty-care products and its North American operations. The cost has been steep: Procter has lost $75 billion in market value since January.

At a time when many executives are saying they want their corporations to act like small, entrepreneurial companies, largely in response to the growth of Internet commerce, Procter's struggles indicate just how difficult a successful transformation is.

Under Mr. Jager, 57, the company tried to bolster a mediocre growth rate by developing products more quickly, eschewing the many-layered approval processes and market tests for which the conservative company was famous. Mr. Jager also moved many managers to new jobs to shake up a corporate culture in which employees are called Proctoids because of their efficiency and obedience.

The initiatives have led to some success -- like Swiffer, a floor-cleaning cloth -- but the price has been too high, the company said yesterday. Costs have risen almost as fast as sales, and the money Procter spent on its initiatives left less to spend on the marketing of its largest businesses.

Earnings per share for the company's fourth quarter, which ends June 30, will be about the same as a year earlier, rather than 15 to 17 percent higher, as the company had estimated. For the fiscal year, Procter is now likely to earn $4.23 billion before one-time charges, up only slightly from $4.15 billion last year, according to Prudential Securities.

Shares of Procter fell $6.125, to $56.75.

In a conference call with analysts, investors and reporters, Mr. Lafley said he would spend the next six weeks studying Procter's spending to decide which efforts should continue to receive their current levels of investment. ''We will make tougher choices,'' said Mr. Lafley.

Although neither he nor Mr. Pepper criticized Mr. Jager by name, they bluntly repudiated the pace with which he had tried to change the $38 billion company. The company moved executives between divisions too rapidly, they said, and it adopted new financial measures that turned out to be too optimistic. Speed, Mr. Lafley said, ''is not a substitute for good business sense.''

''What we thought would take about a year to complete is clearly going to take at least a year longer,'' he said.

As a result, many of Procter's most important brands have underperformed products made by rivals like Kimberly-Clark and PepsiCo's Frito-Lay. Crest, for example, has lost market share to Colgate and Aquafresh as Procter managers have been slow to respond to consumers' growing appetite for toothpastes that promise to do more than simply clean teeth. In the 52 weeks that ended April 23, Crest's sales grew 1.3 percent while overall toothpaste sales increased more than 3 percent, according to Information Resources, a Chicago company that tracks supermarkets, drugstores and larger retailers like Wal-Mart.

Tide is underperforming its rivals in the liquid-detergent aisle. The growth rate of Charmin toilet paper is trailing those of Quilted Northern and Kleenex Cottonelle. Zest, Ivory and Oil of Olay soaps have all lost market share over the last year. And Pringles has fallen further behind Frito Lay's best-selling potato chips, according to Information Resources.

''The focus all went to speeding new products to market,'' said Timothy M. Ghriskey, a senior portfolio manager at the Dreyfus Corporation, which owns shares in the company.

It was the earnings shortfall -- a result of slower-than-expected sales -- that led to the resignation of Mr. Jager, a native of the Netherlands who took over the chief executive's post 17 months ago. Mr. Pepper, 61, who is more popular among employees but also considered less aggressive, originally beat out Mr. Jager for the chairman's job in 1995 only to cede it to him last year after a disappointing and abbreviated term.

In January, newspapers reported that Mr. Jager was considering buying the drugmakers American Home Products and Warner-Lambert in an effort to vastly enlarge Procter's small pharmaceutical division. Investors thought the idea too ambitious and Procter's stock fell more than 10 percent, causing Mr. Jager to abandon his plan reluctantly. Mr. Jager also made overtures to buy Gillette.

In March, Procter warned that its third-quarter profit would be smaller than expected, and shares fell another 30 percent.

Yesterday's news brought the shares down to their 1997 level in what is by far the largest drop over the last two decades for the widely held stock. The decline is likely to aggravate morale problems at the company's Cincinnati headquarters because of the large portion of employee retirement savings that the company puts into its own stock.

The announcement also offers the latest evidence of the struggles that consumer-product companies are experiencing despite the longest economic expansion in United States history. Companies like Coca-Cola and Gillette have been able to push through only moderate price increases, if any. Consumers have refused to pay more for staple goods, and retailers led by Wal-Mart have gained more power through their growing size. At the same time, economic troubles in Asia and Latin America hurt sales in recent years, and the current weakness of the euro has dampened profits in Europe. The rise in oil and paper costs have not helped, either.

Although Mr. Jager said in a statement that the decision to resign was his, analysts said it was yet another example of the small margin of error that chief executives have at a time when the volatile stock market punishes companies that surprise it with bad news.

This year, the top executives at Coca-Cola, Mattel and Xerox have left after producing disappointing results. ''The capital market is taking its vengeance on those who do not get great numbers,'' said Michael Useem, a professor of management at the Wharton School of the University of Pennsylvania. ''And directors are much more inclined just to pull the switch.''

Mr. Lafley graduated from Hamilton College in Clinton, N.Y., and Harvard Business School, and his only full-time job outside of Procter was in the Navy. He is personable and energetic, said Sally J. Dessloch, a vice president at J. P. Morgan Securities, and has a reputation for doing a good job of motivating employees. Other analysts said his style was closer to Mr. Pepper's than to Mr. Jager's.

Photo (pg. C1) Chart: ''A Short and Turbulent Tenure'' Since Durk I. Jager became chief executive of Procter & Gamble in January 1999 the company has suffered a series of setbacks that have hurt its stock price. AUG. 11, 1999 -- P. & G. buys the Iams pet food company for $2.3 billion. JUNE 9, 1999 -- P. & G. says that it will cut 15,000 jobs and close 10 plants. JAN. 21-24, 2000 -- P. & G.'s board discusses buying American Home Products and Warner-Lambert. It abandons the idea after unhappy investors drive down the stock price. MARCH 7, 2000 -- P. & G. warns that it will not meet earnings forecasts. Graph tracks the daily closing price of Proctor and Gamble shares since January 1999. (Source: Bloomberg Financial Markets)(pg. C5)